[Congressional Record (Bound Edition), Volume 154 (2008), Part 11]
[Senate]
[Pages 14747-14748]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       FANNIE MAE AND FREDDIE MAC

  Mr. WEBB. Mr. President, we are going to be talking this week quite a 
bit about the situation with Freddie Mac and Fannie Mae. We had news 
this weekend that the Federal Reserve and Treasury are intending to 
intervene to shore up Freddie Mac and Fannie Mae.
  This situation underscores the depth and the persistence of our 
Nation's housing crisis. Last week, I joined a bipartisan majority of 
Senators in voting to approve a housing bill that is intended to 
strengthen oversight in Fannie Mae and Freddie Mac, to allow the FHA to 
guarantee up to $300 billion in new loans for at-risk subprime 
borrowers. But I think it would be useful at this time to review a few 
recent data points in other areas because they should cause all of us 
some concern about where we are heading and the decisions we are making 
as fiduciaries of the public trust.
  In March of this year, Bear Stearns, the Nation's fifth largest 
investment banking firm, was battered by what its officials termed a 
sudden liquidity crisis regarding or related to its large exposure to 
devalued mortgage-backed securities.
  At that time, Bear Stearns, JPMorgan, and the Federal Reserve reached 
a negotiated deal. JPMorgan purchased 95 million newly issued shares of 
Bear's common stock, and the Fed, which in reality means the people who 
pay the taxes in our country, became responsible for up to $29 billion 
in losses if the collateral provided by Bear Stearns for the loan 
proves to be worth less than their original claims. That is $29 billion 
guaranteed by American taxpayers in the private market.
  This decision was unprecedented. Never before had the Fed bailed out 
a financial entity that was not a commercial bank. The Fed's 
unprecedented role has generated a widespread debate on the 
implications of these types of interventions. Many have had concerns 
that the Government's action tells the market that the Fed is willing 
to help a large and failing financial enterprise, which, in many 
people's view, sets a bad precedent in terms of corporate 
responsibility.
  And by way of information, Bear Stearns' CEO earned $38.4 million in 
2006. They did not file a proxy statement in 2008; his compensation was 
not available for 2007. But I will say that again. In 2006, previous to 
this crisis, the CEO made $38.4 million.
  Last week, IndyMac Bank of Pasadena, CA was closed by the Federal 
Office of Thrift Supervision, and the FDIC, the Federal Deposit 
Insurance Corporation, was named conservator and therefore took over 
this bank's operations. According to the FDIC, the bank's board of 
directors was dissolved, the CEO was fired, and upper management may 
remain, although this has not yet been determined. But the new CEO in 
this situation is now an FDIC employee and is therefore compensated per 
a Government payscale. As conservators, the FDIC will operate the bank 
to maximize the value of the institution for further sale and to 
maintain banking services.
  So when we look at the situation we are now facing with Fannie Mae 
and Freddie Mac, I think it is important to

[[Page 14748]]

lay down three guiding principles. The first is, we do need to ensure 
that the measures we are taking protect these Americans who remain at 
risk of foreclosure. We have to take some proper action now so that 
this crisis does not grow deeper. But we also need to be very sensitive 
to the thousands of workers, many of whom live in this area, who have 
built careers at Fannie Mae and Freddie Mac. Many of those workers have 
their retirement savings tied up in the plummeting stock of these 
formerly robust companies. But as we focus rightly on those two 
concerns, on the homeowners and on the workers, we also need to be 
equally clear that any solution to this crisis has to be fair to the 
American taxpayers who ultimately are going to foot the bill. When 
times go bad like this, quite often the people who are paying the taxes 
are people who do not even own stock, or maybe it is somebody who makes 
$40,000 a year driving a truck who now is being asked to put money up 
to preserve an entity where, again, we see executive compensation and 
stock values over the years have increased.
  Paul Krugman wrote a piece in the New York Times today addressing 
elements of this issue. I want to read a portion of it.

       The case against Fannie and Freddie begins with their 
     peculiar status: although they're private companies with 
     stockholders and profits, they're ``government-sponsored 
     enterprises'' established by Federal law, which means that 
     they receive special privileges. The most important of these 
     privileges is implicit: it's the belief of investors that if 
     Fannie and Freddie are threatened with failure, the Federal 
     Government will come to their rescue.
       This implicit guarantee means that profits are privatized 
     but losses are socialized. If Fannie and Freddie do well, 
     their stockholders [and the corporate executives] reap the 
     benefits, but if things go badly, Washington picks up the 
     tab. Heads they win, tails we lose. Such one-way bets can 
     encourage the taking of bad risks, because the down side is 
     someone else's problem.

  Mr. President, I ask unanimous consent to have the entire New York 
Times article printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                [From the New York Times, July 14, 2008]

                        Fannie, Freddie and You

                           (By Paul Krugman)

       And now we've reached the next stage of our seemingly 
     never-ending financial crisis. This time Fannie Mae and 
     Freddie Mac are in the headlines, with dire warnings of 
     imminent collapse. How worried should we be?
       Well, I'm going to take a contrarian position: the storm 
     over these particular lenders is overblown. Fannie and 
     Freddie probably will need a government rescue. But since 
     it's already clear that that rescue will take place, their 
     problems won't take down the economy.
       Furthermore, while Fannie and Freddie are problematic 
     institutions, they aren't responsible for the mess we're in.
       Here's the background: Fannie Mae--the Federal National 
     Mortgage Association--was created in the 1930s to facilitate 
     homeownership by buying mortgages from banks, freeing up cash 
     that could be used to make new loans. Fannie and Freddie Mac, 
     which does pretty much the same thing, now finance most of 
     the home loans being made in America.
       The case against Fannie and Freddie begins with their 
     peculiar status: although they're private companies with 
     stockholders and profits, they're ``government-sponsored 
     enterprises'' established by federal law, which means that 
     they receive special privileges.
       The most important of these privileges is implicit: it's 
     the belief of investors that if Fannie and Freddie are 
     threatened with failure, the federal government will come to 
     their rescue.
       This implicit guarantee means that profits are privatized 
     but losses are socialized. If Fannie and Freddie do well, 
     their stockholders reap the benefits, but if things go badly, 
     Washington picks up the tab. Heads they win, tails we lose.
       Such one-way bets can encourage the taking of bad risks, 
     because the downside is someone else's problem. The classic 
     example of how this can happen is the savings-and-loan crisis 
     of the 1980s: S.&L. owners offered high interest rates to 
     attract lots of federally insured deposits, then essentially 
     gambled with the money. When many of their bets went bad, the 
     feds ended up holding the bag. The eventual cleanup cost 
     taxpayers more than $100 billion.
       But here's the thing: Fannie and Freddie had nothing to do 
     with the explosion of high-risk lending a few years ago, an 
     explosion that dwarfed the S.&L. fiasco. In fact, Fannie and 
     Freddie, after growing rapidly in the 1990s, largely faded 
     from the scene during the height of the housing bubble.
       Partly that's because regulators, responding to accounting 
     scandals at the companies, placed temporary restraints on 
     both Fannie and Freddie that curtailed their lending just as 
     housing prices were really taking off. Also, they didn't do 
     any subprime lending, because they can't: the definition of a 
     subprime loan is precisely a loan that doesn't meet the 
     requirement, imposed by law, that Fannie and Freddie buy only 
     mortgages issued to borrowers who made substantial down 
     payments and carefully documented their income.
       So whatever bad incentives the implicit federal guarantee 
     creates have been offset by the fact that Fannie and Freddie 
     were and are tightly regulated with regard to the risks they 
     can take. You could say that the Fannie-Freddie experience 
     shows that regulation works.
       In that case, however, how did they end up in trouble?
       Part of the answer is the sheer scale of the housing 
     bubble, and the size of the price declines taking place now 
     that the bubble has burst. In Los Angeles, Miami and other 
     places, anyone who borrowed to buy a house at the peak of the 
     market probably has negative equity at this point, even if he 
     or she originally put 20 percent down. The result is a rising 
     rate of delinquency even on loans that meet Fannie-Freddie 
     guidelines.
       Also, Fannie and Freddie, while tightly regulated in terms 
     of their lending, haven't been required to put up enough 
     capital--that is, money raised by selling stock rather than 
     borrowing. This means that even a small decline in the value 
     of their assets can leave them underwater, owing more than 
     they own.
       And yes, there is a real political scandal here: there have 
     been repeated warnings that Fannie's and Freddie's thin 
     capitalization posed risks to taxpayers, but the companies' 
     management bought off the political process, systematically 
     hiring influential figures from both parties. While they were 
     ugly, however, Fannie's and Freddie's political machinations 
     didn't play a significant role in causing our current 
     problems.
       Still, isn't it shocking that taxpayers may end up having 
     to rescue these institutions? Not really. We're going through 
     a major financial crisis--and such crises almost always end 
     with some kind of taxpayer bailout for the banking system.
       And let's be clear: Fannie and Freddie can't be allowed to 
     fail. With the collapse of subprime lending, they're now more 
     central than ever to the housing market, and the economy as a 
     whole.

  Mr. WEBB. Looking at or thinking about Mr. Krugman's piece, we should 
also recall that the chief executives of those two companies last year 
earned multimillion-dollar compensation packages. We respect the 
guidance and the leadership that allows corporate CEOs to make these 
kinds of compensation, but at the same time, we should not be asking 
the taxpayers of this country, many of whom do not even own stocks, if 
we are buttressing the activities of these companies, to continue to 
assist financially this type of corporate compensation.
  We have seen one example with the recent IndyMac Bank failure where 
the FDIC came in and the acting CEO gets a regular Federal salary. I 
urge all of my colleagues to think about this this week, that, as Mr. 
Krugman says, ``the profits are privatized,'' meaning the small group 
of people who own stocks take advantage when things go well, and 
sometimes we talk about economic Darwinism and how the fact that they 
make that sort of compensation relates to their talent, ``but losses 
are socialized'' meaning that everyone in the country ends up having to 
pay when things go wrong in order to protect the system from falling 
apart.
  Well, the bottom line of that is, if our taxpayers are going to be 
required to chip in to solve the problem, they should not be alone. The 
executives who are involved in the operations of these institutions 
should also be willing to do the same.
  I yield the floor, and I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. REID. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The majority leader is recognized.

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